The 2026 Sustainable Global Leaders Conference returns to the banks of Shanghai's Huangpu River from October 20 to 22. Nobel laureates and Turing Award winners will speak on the future and trends of technology, and the internet-famous professor who helps "rescue" people from anxiety and the era of excessive competition, Macfarlane, will hold a live dialogue with Xiang Biao!
Seats are limited, so act quickly. Let us join together for the appointment with sustainability! [Click to Register] One may consider seizing the October-December window to front-load counter-cyclical regulation. Since the Fed unanimously approved a 25 basis point rate hike to 3.75%-4.00% on September 16, 2026, market expectations for the Fed's future rate hikes have changed considerably. Affected by energy prices, the market's pricing of the probability of an October hike once approached about 65% in late September, but as the newly released September nonfarm payrolls data fell back, rate hike expectations cooled markedly again. After the U.S. September inflation data were released on October 14, CME's "FedWatch" tool showed that the probability of the Fed raising rates by 25 basis points in October rose from about 20% previously to about 50%. We believe that the Fed's subsequent rate path still faces uncertainty. Considering constraints on aggressive Fed tightening such as a cooling job market and the midterm elections, October may be an observation period, but it is necessary to guard against the risk that inflation picks up again and causes the path for December and 2027 to steepen again. According to the consumer expectations survey released by the New York Fed, U.S. consumers' one-year inflation expectation rose to 3.9% in September from 3.58% the previous month. The three-year inflation expectation rose 0.1 percentage point to 3.3%; the five-year inflation expectation was unchanged at 3.0%. Considering the difference in inflation levels between China and the United States, the inversion of real interest rates between the two countries is not as severe as nominal data suggest. One may consider seizing the October-December window to front-load counter-cyclical regulation and make promoting U.S. tariff reductions and stabilizing oil prices an important lever for easing external pressure.
The Fed's subsequent policy path still faces uncertainty
On September 16, the FOMC unanimously raised rates by 25 basis points, lifting the federal funds rate target range to 3.75%-4.00%. The Summary of Economic Projections showed that the median rate for the end of 2026 was revised up to 4.1% from 3.8% in June, and the end-2027 median was revised up to 4.1% from 3.6%, while the return to the 2% inflation target was postponed to 2029. Among the 18 Fed officials who submitted projections, 16 expected at least one more rate hike within the year, with 12 supporting a 25 basis point increase and 4 supporting a 50 basis point increase, and none expected a rate cut. We believe that uncertainty over the Fed's subsequent policy path remains substantial. First, this rate hike was not actively led unilaterally by the Fed, but was instead a passive confirmation after policy was "locked in" by market pricing. The unanimous September hike stemmed more from the need to establish anti-inflation credibility and safeguard financial stability. This is because, before the meeting, CME interest rate futures had priced in the hike almost completely. If the Fed had chosen to stand pat, it would have triggered violent asset repricing and dealt a direct blow to the new chair's anti-inflation credibility early in his tenure. In addition, with long-end rates elevated and the fiscal interest burden heavy, with the 10-year U.S. Treasury yield rising by more than 50 basis points in September 2026 and breaking above 5.3%, the highest since 2002 and above the 2007 peak, while the 30-year yield reached 5.615% at one point, open divisions would be magnified by the market into policy uncertainty and intensify volatility in U.S. Treasuries and the dollar. Second, current market pricing of the probability of an October hike shows strong event-driven characteristics and large swings, and special attention must be paid to the impact of geopolitical shocks on energy prices. The sharp fluctuations in market pricing confirm this: the probability of an October hike climbed from 49.8% on September 17 all the way to about 75% on September 23, then fell back to 64.2% on September 26 as oil prices fluctuated; after August PCE came in below expectations on September 30, it dropped to 47.1%, and after September nonfarm payrolls came in far below expectations on October 2, it fell further to 24.9%, while the probability of keeping the policy rate unchanged rose to 75.1%. Third, the Fed's policy focus is shifting from the supply side to the demand side. Judging from the September meeting statement, the FOMC deleted language that "inflation partly stems from supply shocks such as energy," further increasing uncertainty about the Fed's future rate path. The meeting minutes released on October 7 also showed that participating officials believed rapidly growing AI investment is increasing inflationary pressure. If inflation picks up for a second time, it could make the rate hike process more aggressive, and then the possibility cannot be ruled out of consecutive hikes in October and December and an increase to 4.50%-4.75% in the first quarter of 2027.
Constraints on aggressive Fed rate hikes
Of course, aggressive Fed rate hikes also face some constraints. First, the latest data mix shows that the U.S. economy is characterized by "still-high inflation and weakening employment," and the policy cost of rate hikes is rising. On the one hand, August PCE was 3.4% year on year and core PCE was 3.0% year on year, still significantly above the 2% target; on the other hand, September nonfarm payrolls increased by only 29,000, the unemployment rate rose to 4.2%, and average hourly earnings growth slowed to 3.0% year on year. Rate hikes can hardly ease the cost-push pressure from energy and tariffs, and will further suppress employment. Second, although demand remains resilient, it is necessary to guard against the impact of elevated market interest rates on booming AI capital expenditure. Corporate bond and equity financing costs will rise with the risk-free rate, possibly "pricking" this round of AI "bubble." For the AI industry, this constraint is especially critical. Huge funding gaps still rely on bonds, equity, and project financing, and both the return threshold and financing difficulty of AI projects will rise, while high risk-free yields will also depress technology stock valuations. The actual evolution may be more tortuous and complex. In the short term, the higher AI capital expenditure is, the more it may strengthen the Fed's case for rate hikes; but if high rates ultimately trigger a pullback in capital expenditure, the Fed may also fall into a passive situation of "first overshooting, then being forced to turn," increasing the possibility of medium- and long-term risk outbreaks. Therefore, the Fed still needs to decide cautiously. Third, the social cost of aggressive Fed rate hikes is relatively high, and the Volcker period from 1979 to 1987 provides a historical reference. To curb inflation, the federal funds rate rose from about 10% in early 1979 to 19% in mid-1981, unemployment exceeded 10%, nearly 25,000 enterprises went bankrupt in 1982, and the number exceeded 52,000 in 1984. The rate hike cycle led by the Fed under Volcker produced a significant wealth redistribution effect. Although disinflation had positive aggregate benefits, the cost of severe tightening was highly concentrated among wage earners and low- and middle-wealth households, while the benefits flowed more to creditors and the financial sector, objectively intensifying polarization and social division. By contrast, the social cost of the Fed maintaining high rates has already increased. The latest monthly survey by the New York Fed shows that consumers' views of their own financial situation worsened for the second consecutive month. About 42% of households said their current financial situation was "much worse" or "somewhat worse" than a year earlier, while only about 18% said it had improved. In addition, the proportion of households expecting their financial situation to worsen over the next year also rose, and more consumers believe it is now harder to obtain credit than a year ago. Consumers still expect spending growth over the next year to exceed income growth. For American consumers who need to pay credit card bills, if high interest rates do not bring relief from inflation, they will instead become one reason for higher living costs and worsening financial conditions for U.S. households.
Potential impact of Fed rate hike uncertainty on China
For China, Fed rate hikes may bring dual effects: on the one hand, monetary tightening may trigger domestic political backlash in the United States, which will increase its incentive to divert contradictions externally and strengthen trade protection demands; on the other hand, this precisely means that under midterm election pressure the U.S. side has an internal motive to ease tariffs on China, creating an opportunity for us to gain negotiating space. Given that China's trade surplus is far higher than in the same period in previous years, the traditional interest rate differential channel of Fed rate hikes has not triggered large fluctuations in the RMB exchange rate, and what may deserve more attention is the transmission effect on China's economy through trade channels from a possible contraction in AI capital expenditure caused by U.S. rate hike expectations. Since 2026, AI has become the first engine driving China's foreign trade growth, and this boom is highly dependent on the continued expansion of overseas AI capital expenditure. From the perspective of subcategories, China's AI-related exports are highly concentrated in intermediate input products. In terms of prices, the essence of the surge in AI export value is that AI capital expenditure pushes up the prices of core components such as chips and amplifies export value through the price transmission mechanism. This confirms at the mechanism level the strong link between AI exports and overseas AI capital expenditure. But if the Fed implements more aggressive rate hikes under inflation pressure, it is also necessary to guard against the tail risk of triggering a reversal in China's foreign exchange settlement trend and increasing RMB exchange rate volatility. As mentioned earlier, China's current exchange rate resilience essentially reflects that foreign exchange settlement demand temporarily exceeds interest rate differential pricing. However, as the positive feedback from settlement strengthens, its fragility also rises simultaneously. According to the central bank's financial institution foreign exchange credit receipts and payments data, by the end of August China's non-financial enterprise foreign exchange deposit balance was US$644.8 billion. Once expectations of RMB depreciation form, enterprises will delay settlement, and the above foreign exchange deposits may turn from a "buffer cushion" into a "barrier lake," reactivating the classic interest rate differential transmission channel. In fact, if the two supply-side factors of oil prices and tariffs are eased, the necessity of rate hikes will naturally decline, which will help ease the external pressure brought to China by Fed rate hikes. One may consider using midterm election pressure to further push the U.S. side to ease tariffs on China. At present, the root cause of U.S. inflation still lies more in supply shocks, namely energy prices and tariff costs. Data show that U.S. CPI rose 3.7% year on year in September, 0.3 percentage point higher than 3.4% in August, while rising 0.6% month on month. High oil prices are one of the main reasons for the rise in overall inflation. Rate hikes are only a suboptimal option for curbing inflation and may even exact a large cost by suppressing demand. A CNN poll showed that 77% of American adults believe current government policies have pushed up their living costs, with 65% blaming tariffs; previously, the U.S. Supreme Court ruled that imposing global tariffs under the International Emergency Economic Powers Act exceeded presidential authority. The damaged legal basis for U.S. tariff tools and rising fiscal and electoral pressure are the realistic foundation for us to seek negotiating space. Therefore, one may consider using midterm election pressure to push the U.S. side to reduce the intensity of trade protection.
China's counter-cyclical regulation in the fourth quarter should be front-loaded
At present, China's CPI is about 0.9% year on year, while that of the United States is about 3.7%. After excluding inflation, the inversion in the real interest rate differential between China and the United States is far smaller than the nominal value. Therefore, the real constraint of external rate hikes on China is more reflected in compressing the space for domestic price-based monetary policy. Since the October Fed meeting is still quite likely to stand pat, the roughly six weeks afterward until the December 8-9 meeting are a "quiet window" for Fed monetary policy and also a period when China's counter-cyclical regulation is less disturbed by external factors. In terms of tool selection, monetary policy should give priority to promoting the implementation and effectiveness of quantity-based tools. This is because price-based tools are more constrained by interest rate differentials, while quantity-based tools can directly supplement liquidity and coordinate with government bond issuance. The incremental policies just launched in China at the end of September are also mainly quantity-based tools, such as including the "six networks" in the scope of PSL support, and expanding relending for technological innovation and technological upgrading, as well as relending for agriculture and small and micro businesses. Their implementation effects remain to be observed, because the effect of policy implementation also depends on the degree of response on the demand side. On this basis, a small reserve requirement ratio cut, such as 25 basis points, can still be kept as a reserve policy, because it helps ease pressure on commercial banks' net interest margins and increases incentives for banks to expand credit extension. The fiscal focus should shift to supporting domestic demand and forming tangible work volume within the year. In September, China's manufacturing PMI was 50.1%, up 0.3 percentage point from the previous month, ending two consecutive months of contraction and returning to the expansion range; the non-manufacturing business activity index was 50.2%, up 1.2 percentage points, further consolidating the trend of economic recovery and improvement, but the foundation is not yet solid and continued policy support is needed. One may consider using part of fiscal funds directly to repair household balance sheets and stabilize household cash flow and consumption capacity. In summary, the probability of a Fed rate hike in October fell from nearly 65% to 20.5% within half a month, then rose sharply after the release of U.S. inflation data. This is a direct manifestation of uncertainty in its rate path and also a true reflection of policy and the market pulling and influencing each other. At present, the crux of U.S. inflation still lies mainly on the supply side, and energy and tariffs are the fundamental remedies, while rate hikes are only a suboptimal option with high costs and the potential to intensify social division. For China, the main risk may not currently be a widening China-U.S. interest rate differential, but rather the impact on China's economy through trade channels from a possible contraction in AI capital expenditure caused by U.S. rate hike expectations. In addition, attention should be paid to the risk that the Fed may aggressively raise rates, triggering a reversal in China's foreign exchange settlement trend and increasing RMB exchange rate volatility. We should cherish the window period for front-loading policy efforts in the fourth quarter, further consolidate the trend of economic recovery and improvement, and strive to complete the annual economic development targets and tasks. Sina partner platform futures account opening is safe, fast, and secure.
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